<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NO. 1-11342
LODGIAN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-2093696
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3445 PEACHTREE ROAD, N.E., SUITE 700, 30326
ATLANTA, GA (Zip Code)
(Address of principal executive offices)
</TABLE>
(Registrant's telephone number, including area code): (404) 364-9400
(Former name, former address and former fiscal year, if changed since last
report): NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF January 3, 2001
------- ----------------------------------
<S> <C>
Common 28,139,481
</TABLE>
<PAGE> 2
LODGIAN, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999................................... 1
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999 ..... 2
Condensed Consolidated Statements of Stockholders' Equity
for the Nine Months Ended September 30, 2000 and for the
Year Ended December 31, 1999................................. 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999..................... 4
Notes to Condensed Consolidated Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 31
Item 2. Changes in Securities........................................ 31
Item 6. Exhibits and Reports on Form 8-K............................. 31
SIGNATURES.................................................................. 33
</TABLE>
i
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,516 $ 14,644
Restricted cash........................................... 3,242 2,692
Accounts receivable, net of allowances.................... 27,827 26,520
Inventories............................................... 8,155 9,190
Prepaid expenses and other current assets................. 10,936 9,984
---------- ----------
Total current assets.............................. 64,676 63,030
Property and equipment, net................................. 1,114,010 1,314,141
Deposits for capital expenditures........................... 14,856 12,357
Other assets, net........................................... 32,495 32,468
---------- ----------
$1,226,037 $1,421,996
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 26,659 $ 34,332
Accrued interest.......................................... 12,532 13,390
Other accrued liabilities................................. 39,006 42,783
Advance deposits.......................................... 2,106 2,384
Current portion of long-term obligations.................. 77,754 35,404
---------- ----------
Total current liabilities......................... 158,057 128,293
Long-term obligations, less current portion................. 710,418 856,675
Deferred income taxes....................................... 3,977 33,082
Minority interests:
Preferred redeemable securities (including related accrued
interest).............................................. 181,125 175,000
Other..................................................... 4,012 4,404
---------- ----------
Total liabilities................................. 1,057,589 1,197,454
Commitments and contingencies...............................
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares
authorized; 28,266,682 and 28,130,325 shares issued and
outstanding at September 30, 2000 and December 31,
1999, respectively..................................... 282 281
Additional paid-in capital................................ 263,168 262,760
Accumulated deficit....................................... (94,090) (37,587)
Accumulated other comprehensive loss...................... (912) (912)
---------- ----------
Total stockholders' equity........................ 168,448 224,542
---------- ----------
$1,226,037 $1,421,996
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Rooms....................................... $117,425 $116,549 $334,643 $328,212
Food and beverage........................... 30,772 31,892 98,721 101,018
Other....................................... 7,007 7,579 21,398 22,457
-------- -------- -------- --------
Total revenues........................... 155,204 156,020 454,762 451,687
-------- -------- -------- --------
Operating expenses:
Direct:
Rooms....................................... 32,827 33,213 93,326 90,335
Food and beverage........................... 23,719 23,810 72,402 74,351
Other....................................... 4,225 4,552 13,142 12,768
General, administrative and other............ 56,178 48,864 167,967 145,374
Depreciation and amortization................ 16,908 13,102 49,348 40,602
Impairment of long-lived assets.............. (10,712) -- 55,450 --
Severance and restructuring expenses......... -- -- 1,502 --
-------- -------- -------- --------
Total operating expenses................. 123,145 123,541 453,137 363,430
-------- -------- -------- --------
32,059 32,479 1,625 88,257
Other income (expenses):
Interest income and other................... 467 285 994 1,102
Interest expense............................ (24,596) (20,317) (74,426) (57,456)
Interest hedge break fee.................... (4,294) -- (4,294) --
Loss on asset dispositions, net............. (21) -- (24) --
Minority interests:
Preferred redeemable securities............. (3,063) (3,338) (9,190) (10,152)
Other....................................... 250 1,310 (293) --
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.......................... 802 10,419 (85,608) 21,751
Provision (benefit) for income taxes......... 275 4,167 (29,105) 8,700
-------- -------- -------- --------
Income (loss) before extraordinary item...... 527 6,252 (56,503) 13,051
Extraordinary item:
Loss on early extinguishment of debt, net of
income tax benefit of $4,224................ -- (6,336) -- (6,336)
-------- -------- -------- --------
Net income (loss)............................ $ 527 $ (84) $(56,503) $ 6,715
======== ======== ======== ========
Earnings (loss) per common share-basic and
diluted:
Income (loss) before extraordinary item...... $ 0.02 $ 0.23 $ (2.01) $ 0.48
Extraordinary item........................... -- (0.23) -- $ (0.23)
-------- -------- -------- --------
Net income (loss)............................ $ 0.02 $ -- (2.01) $ 0.25
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER TOTAL
------------------- PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) LOSS EQUITY
---------- ------ ---------- ------------ ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998........................ 27,937,057 $278 $261,976 $ 23,106 $(1,593) $283,767
401(k) Plan contribution...... 143,160 2 547 -- -- 549
Exercise of stock options..... 30,000 1 119 -- -- 120
Tax benefit from exercise of
stock options............... -- -- 20 -- -- 20
Director compensation......... 20,108 -- 98 -- -- 98
Net loss...................... -- -- -- (60,693) -- (60,693)
Currency translation
adjustments................. -- -- -- -- 681 681
--------
Comprehensive loss............ -- -- -- -- -- (60,012)
---------- ---- -------- -------- ------- --------
Balance at December 31,
1999........................ 28,130,325 281 262,760 (37,587) (912) 224,542
401(k) Plan contribution...... 127,123 1 373 -- -- 374
Director compensation......... 9,234 -- 35 -- -- 35
Net loss...................... -- -- -- (56,503) -- (56,503)
Currency translation
adjustments................. -- -- -- -- -- --
--------
Comprehensive loss............ -- -- -- -- -- (56,503)
---------- ---- -------- -------- ------- --------
Balance at September 30, 2000 28,266,682 $282 $263,168 $(94,090) $ (912) $168,448
========== ==== ======== ======== ======= ========
</TABLE>
The comprehensive income for the three months ended September 30, 2000 was
$527 and the comprehensive (loss) and income for the three and nine months
ended September 30, 1999 was $(84) and $6,679, respectively.
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
September 30, September 30,
2000 1999
------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................. $ (56,503) $ 6,715
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .................................. 49,348 40,602
Loss on asset dispositions, net ................................ 24 --
Deferred income tax provision (benefit) ........................ (29,105) 4,476
Minority interests ............................................. 6,416 --
Impairment of long-lived assets ................................ 55,450 --
Loss on early extinguishment of debt ........................... -- 10,560
Other .......................................................... (944) (5,455)
Changes in operating assets and liabilities:
Accounts receivable .......................................... (1,307) (14,660)
Inventories .................................................. 1,035 28
Other current assets ......................................... (1,502) (19,946)
Accounts payable ............................................. (7,673) (26,341)
Accrued liabilities .......................................... (4,913) 5,138
--------- ---------
Net cash provided by (used in) operating activities ................. 10,326 1,117
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures, net ......................................... (68,205) (63,659)
Acquisitions of property and equipment ............................ -- (1,929)
Purchase of minority interests .................................... -- (10,200)
Proceeds from disposition of assets ............................... 168,898 20,468
Other ............................................................. -- 371
Net withdrawals (deposits) for capital expenditures ............... (2,970) 27,737
--------- ---------
Net cash provided by (used in) investing activities ................. 97,723 (27,212)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................ -- 120
Proceeds from issuance of long-term obligations ................... 32,326 477,860
Principal payments on long-term obligations ....................... (136,520) (442,299)
Payments of deferred loan costs ................................... (3,300) (4,699)
Contributions from (distributions to) minority interests .......... (683) (690)
--------- ---------
Net cash provided by (used in) financing activities ................. (108,177) 30,292
--------- ---------
Net increase (decrease) in cash and cash equivalents ................ (128) 4,197
Cash and cash equivalents at beginning of period .................... 14,644 19,185
--------- ---------
Cash and cash equivalents at end of period .......................... $ 14,516 $ 23,382
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized ............................. $ 72,509 $ 50,714
========= =========
Income taxes .................................................... $ 584 $ 3,065
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements include the accounts of
Lodgian, Inc. ("Lodgian" or the "Company"), its wholly-owned subsidiaries and
five partnerships in which Lodgian exercises control. Lodgian believes it has
control of partnerships when the Company manages and has control of the
partnerships' assets and operations, has the ability and authority to enter into
financing arrangements on behalf of the entity or to sell the assets of the
entity within reasonable business guidelines. One unconsolidated entity is
accounted for on the equity method. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accounting policies followed for quarterly financial reporting are
the same as those disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting primarily
of normal recurring adjustments, necessary to present fairly the financial
position of the Company as of September 30, 2000, and the results of its
operations for the three and nine month periods ended September 30, 2000 and its
cash flows for the nine months ended September 30, 2000. The results for interim
periods are not necessarily indicative of results for the entire year. While
management believes that the disclosures presented are adequate to make the
information not misleading, these financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
As previously reported in the Company's Form 10-K for the year ended
December 31, 1999, during the fourth quarter of 1999, the Company initiated an
internal review of its accounting records. The Company experienced significant
difficulty in the integration and conversion of information and accounting
systems subsequent to the merger of Servico, Inc. and Impac Hotel Group, LLC on
December 11, 1998 (the "Merger"). In addition, the Company determined that a
significant number of reconciliations involving cash, accounts receivable, fixed
assets, accounts payable and other accounts had not been completed during 1999.
As a result of these systems and reconciliation issues, the Company experienced
a significant delay in preparing its 1999 annual financial statements. Certain
charges were recorded in the fourth quarter of 1999 after the account
reconciliation process was completed in 2000.
Also, as previously reported in the Company's Form 10-K for the year
ended December 31, 1999, the Company concluded, after consultation with its
prior independent auditors that its internal controls for the preparation of
interim financial information did not provide an adequate basis for its prior
independent auditors to complete reviews of the 1999 quarterly financial
information in accordance with standards established by the American Institute
of Certified Public Accountants. The Company believes that certain charges that
were recorded in the fourth quarter of 1999 may relate to individual prior
quarters; however the Company does not have sufficient information to identify
all specific charges attributable to prior 1999 quarters.
In the opinion of management, the internal control weaknesses described
above existed during the first and second quarters of 2000 and to a lesser
extent in the third quarter of 2000. These internal control weaknesses caused a
significant delay in preparing the Company's September 30, 2000 Form 10-Q. The
Company has committed substantial resources to mitigate the previously
identified control weaknesses including contracting with outside consulting
accountants to ensure the Company has the corporate financial resources needed
5
<PAGE> 8
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to provide reasonable assurances that it can comply with the record keeping and
internal control requirements applicable to SEC registrants. Management
believes these efforts have enabled the Company to produce reliable interim
financial statements as of September 30, 2000 and for the three and nine
months then ended. The Company is in the process of implementing a plan
which, if successful, will enable the Company to timely comply with the
financial statement reporting requirements applicable to SEC registrants by
the time it is required to file its 2000 annual financial statements and
will have substantially developed and implemented an adequate control
environment by this date. As part of this plan, during the third and fourth
quarters the Company has implemented the following action steps; (i)
developed and implemented numerous new controls and policies, (ii) implemented a
process to insure that material transactions are recorded on a timely basis,
(iii) implemented an account closing process so that all material accounts are
reconciled and reviewed on a timely basis and (iv) reorganized and changed
personnel in the accounting and finance functions to improve the accuracy and
timeliness of the financial accounting processes.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior period financial
statements in order to conform to the current period presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item................. $ 527 $ 6,252 $(56,503) $ 13,051
Extraordinary item...................................... -- (6,336) -- (6,336)
-------- -------- -------- --------
Net income (loss)....................................... $ 527 $ (84) $(56,503) $ 6,715
======== ======== ======== ========
Denominator:
Denominator for basic and dilutive earnings
per share-adjusted weighted-average shares.............. 28,251 27,282 28,055 27,041
======== ======== ======== ========
Basic and diluted earnings per share:
Income (loss) before extraordinary item................. $ 0.02 $ 0.23 $ (2.01) $ 0.48
Extraordinary item...................................... -- (0.23) -- (0.23)
-------- -------- -------- --------
Net (loss) income....................................... $ 0.02 $ -- $ (2.01) $ 0.25
======== ======== ======== ========
</TABLE>
The computation of diluted earnings per share did not include shares
associated with the assumed conversion of the Convertible Redeemable
Equity Structure Trust Securities (CRESTS), employee stock options and
contingent shares in connection with the Merger because their inclusion
would have been antidilutive.
3. ASSETS HELD FOR SALE
As discussed in footnote 7. and Item 2. Management's Discussion and
6
<PAGE> 9
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Analysis of Financial Condition and Results of Operations, the Company has
adopted strategic plans to reduce the size of the Company's non-core hotel
portfolio and reduce the level of overall debt of the Company. In this regard,
the Company has identified and will continue to identify throughout 2000 and
2001 properties which will be classified as held for sale to meet these
objectives.
Impairment charges for the three and nine month periods ended
September 30, 2000 were $(10.7) million and $55.5 million,
respectively. During 2000 the Company's first quarter charge of $9.6 million
related to revised estimates of fair value for properties held for sale
at December 31, 1999 and the second quarter charge of $56.6 million related
to the ten hotels sold to Sunstone Investors, LLC on August 31, 2000.
During the third quarter 2000 the Company recaptured $10.7
million of impairment charges recorded in 1999 and 2000 as seven
hotels previously considered held for sale as of December 31, 1999 are
no longer being actively marketed for sale. The Company may incur
additional impairment charges in the fourth quarter 2000 and in 2001 as it
continues to identify properties to be considered held for sale to meet the
objectives described.
Summary results of operations included in the Statement of
Operations with respect to the properties identified as held for sale at
September 30, 2000 are as follows (in thousands):
<TABLE>
<CAPTION> THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2000
------------- -------------
<S> <C> <C>
Revenues................................. $ 9,291 $26,635
======= =======
Income (loss) before taxes............... $ 1,289(1) $ (2,242)(1)
======= =======
</TABLE>
-------------
(1) Includes impairment charge of $0.0 million and $8.5 million,
respectively.
Included in property and equipment, net at September 30, 2000 is $62.1
million related to properties identified as held for sale at September 30,
2000.
4. COMMITMENTS AND CONTINGENCIES
In July 1999, a contractor hired by Servico to perform work on hotels
in New York, Illinois and Texas filed a complaint against the Company in the
Supreme Court of the State of New York, claiming breach of contract and
quantum meruit, among other claims. The contractor seeks damages totaling $80
million, including $60 million punitive damages. The Company answered the
complaint asserting counterclaims aggregating $20 million and successfully
filed a motion to dismiss the claims related to two properties located in
Illinois and Texas. In October 1999, a subcontractor filed a lawsuit in
Texas against the above contractor and the Company. The Company has
filed an answer and cross-claim against the contractor in the amount of $2.8
million. In February 2000, the contractor filed a lawsuit in Texas claiming
over $3 million in actual damages and an undisclosed amount of punitive
damages. The Company answered the complaint and asserted a
counterclaim. The Company has also filed a lawsuit against the
contractor in Federal District Court in Illinois, seeking $2 million. The
contractor has filed an answer and counterclaim aggregating $2.8 million in
actual damages and $10 million in punitive damages. The Company believes
that it has valid defenses and counterclaims in these matters and that
the outcome will not have a material adverse effect on its
financial position or results of operations.
7
<PAGE> 10
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an
arbitration claim against the Company claiming breach of contract relating to a
January 4, 1992 contract. WH claims entitlement to profit participation
relating to the sale of certain hotel properties by an affiliate and
predecessor of the Company. Although the Demand for Arbitration does not make a
specific damages demand, it is believed that WH is claiming approximately
$1,100,000 from the Company. Lodgian believes it has meritorious defenses to
this matter and is defending it vigorously.
The Company is a party to other legal proceedings arising in the
ordinary course of business, the impact of which would not, either individually
or in the aggregate, in management's opinion, have a material adverse effect on
financial condition or results of operations.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and derivatives used
for hedging purposes. SFAS No. 133 requires that entities recognize all
derivative financial instruments as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137 and 138, is effective for the Company
in its first fiscal quarter 2001. The Company doesn't presently believe that
the adoption of SFAS No. 133 will have a significant effect on its financial
position or its results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which addresses revenue recognition issues. SAB 101 is required to
be adopted for the quarter ending December 31, 2000. The Company has assessed
the types of transactions that may be impacted by this pronouncement. The impact
of SAB 101 on the financial statements of the Company will not be material.
6. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the Company's sale of $200 million of 12 1/4%
Senior Subordinated Notes (the "Notes") in July 1999, certain of the Company's
subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's
obligations to pay principal and interest with respect to the Notes. Each
Subsidiary Guarantor is wholly-owned and management has determined that
separate financial statements for the Subsidiary Guarantors are not material to
investors. The subsidiaries of the Company that are not Subsidiary Guarantors
are referred to in the note as the "Non-Guarantor Subsidiaries".
The following supplemental condensed consolidating financial
statements present balance sheets as of September 30, 2000 and December 31,
1999 and statements of operations for the three and nine months ended September
30, 2000 and 1999 and the statements of cash flows for the nine months ended
September 30, 2000 and 1999. In the condensed consolidating financial
statements, Lodgian, Inc. (the "Parent") accounts for its investments in
wholly owned subsidiaries using the equity method.
8
<PAGE> 11
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents............ $ 59 $ 20,661 $ (6,204) $ -- $ 14,516
Restricted cash...................... -- -- 3,242 -- 3,242
Accounts receivable, net of
allowances......................... -- 12,173 15,654 -- 27,827
Inventories.......................... -- 3,679 4,476 -- 8,155
Prepaid expenses and other current
assets............................. 2,254 141 8,541 -- 10,936
--------- --------- --------- -------- ----------
Total current assets........... 2,313 36,654 25,709 -- 64,676
Property and equipment, net............ -- 596,160 517,850 -- 1,114,010
Deposits for capital expenditures...... -- 3,645 11,211 -- 14,856
Investment in consolidated
entities............................. (264,817) -- -- 264,817 --
Due from (to) affiliates............... 439,781 (242,179) (197,602) -- --
Other assets, net...................... 36 18,431 14,028 -- 32,495
--------- --------- --------- -------- ----------
$ 177,313 $ 412,711 $ 371,196 $264,817 $1,226,037
========= ========= ========= ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................... $ -- $ 16,813 $ 9,846 $ -- $ 26,659
Accrued interest..................... -- 11,546 986 -- 12,532
Other accrued liabilities............ -- 9,698 29,308 -- 39,006
Advance deposits..................... -- 1,113 993 -- 2,106
Current portion of long-term
obligations........................ -- 62,400 15,354 -- 77,754
--------- --------- --------- -------- ----------
Total current
liabilities.................. -- 101,570 56,487 -- 158,057
Long-term obligations, less current
portion.............................. 3,976 388,315 318,127 -- 710,418
Deferred income taxes.................. 3,977 -- -- -- 3,977
Minority interests:
Preferred redeemable securities
(including related accrued
interest).......................... -- -- 181,125 -- 181,125
Other................................ -- -- 4,012 -- 4,012
--------- --------- --------- -------- ----------
Total liabilities.............. 7,953 489,885 559,751 -- 1,057,589
--------- --------- --------- -------- ----------
Commitments and contingencies..........
Stockholders' equity:
Common stock......................... 282 33 441 (474) 282
Additional paid-in capital........... 263,168 22,619 (42,085) 19,466 263,168
Accumulated deficit.................. (94,090) (98,914) (146,911) 245,825 (94,090)
Accumulated other comprehensive
loss............................... -- (912) -- -- (912)
--------- --------- --------- -------- ----------
Total stockholders'
equity (deficit)............. 169,360 (77,174) (188,555) 264,817 168,448
--------- --------- --------- -------- ----------
$ 177,313 $ 412,711 $ 371,196 $264,817 $1,226,037
========= ========= ========= ======== ==========
</TABLE>
9
<PAGE> 12
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 59 $ 9,910 $ 4,675 $ -- $ 14,644
Restricted cash....................... -- -- 2,692 -- 2,692
Accounts receivable, net.............. -- 8,257 18,263 -- 26,520
Inventories........................... -- 4,116 5,074 -- 9,190
Prepaid expenses and other current
assets.............................. 2,342 64 7,578 -- 9,984
--------- --------- --------- -------- ----------
Total current assets............ 2,401 22,347 38,282 -- 63,030
Property and equipment, net............. -- 610,854 703,287 -- 1,314,141
Deposit for capital expenditures........ -- -- 12,357 -- 12,357
Investment in consolidated entities..... (208,123) -- -- 208,123 --
Due from (to) affiliates................ 467,811 (246,793) (221,018) -- --
Other assets, net....................... 136 18,762 13,570 -- 32,468
--------- --------- --------- -------- ----------
$ 262,225 $ 405,170 $ 546,478 $208,123 $1,421,996
========= ========= ========= ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ -- $ 13,471 $ 20,861 $ -- $ 34,332
Accrued interest...................... -- 12,310 1,080 -- 13,390
Other accrued liabilities............. -- 7,318 35,465 -- 42,783
Advance deposits...................... -- 1,088 1,296 -- 2,384
Current portion long-term
obligations......................... -- 27,400 8,004 -- 35,404
--------- --------- --------- -------- ----------
Total current liabilities....... 61,587 66,706 -- 128,293
Long-term obligations, less current
portion............................... 3,689 411,761 441,225 -- 856,675
Deferred income taxes................... 33,082 -- -- -- 33,082
Minority interests:
Preferred redeemable securities....... -- -- 175,000 -- 175,000
Other................................. -- -- 4,404 -- 4,404
--------- --------- --------- -------- ----------
Total liabilities............... 36,771 473,348 687,335 -- 1,197,454
--------- --------- --------- -------- ----------
Commitments and contingencies...........
Stockholders' equity:
Common stock.......................... 281 33 440 (473) 281
Additional paid-in capital............ 262,760 22,619 (41,893) 19,274 262,760
Accumulated deficit................... (37,587) (89,918) (99,404) 189,322 (37,587)
Accumulated other comprehensive
loss................................ -- (912) -- -- (912)
--------- --------- --------- -------- ----------
Total stockholders' equity
(deficit)..................... 225,454 (68,178) (140,857) 208,123 224,542
--------- --------- --------- -------- ----------
$ 262,225 $ 405,170 $ 546,478 $208,123 $1,421,996
========= ========= ========= ======== ==========
</TABLE>
10
<PAGE> 13
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms.................................. $ -- $ 52,189 $ 65,236 $ -- $117,425
Food and beverage...................... -- 13,033 17,739 -- 30,772
Other.................................. -- 2,633 4,374 -- 7,007
---- -------- -------- ----- --------
Total revenues................... -- 67,855 87,349 -- 155,204
---- -------- -------- ----- --------
Operating expenses:
Direct:
Rooms................................. -- 14,747 18,080 -- 32,827
Food and beverage..................... -- 10,085 13,634 -- 23,719
Other................................. -- 1,856 2,369 -- 4,225
General, administrative and other....... -- 23,203 32,975 -- 56,178
Depreciation and amortization........... -- 7,244 9,664 -- 16,908
Impairment of long-lived assets......... -- (5,396) (5,316) -- (10,712)
---- -------- -------- ----- --------
Total operating expenses........ -- 51,739 71,406 -- 123,145
---- -------- -------- ----- --------
-- 16,116 15,943 -- 32,059
Other income (expenses):
Interest income and other............. -- -- 467 -- 467
Interest expense...................... -- (14,547) (10,049) -- (24,596)
Interest hedge break fee.............. -- -- (4,294) -- (4,294)
Gain (loss) on asset dispositions, net -- 56 (77) -- (21)
Equity in income of consolidated
subsidiaries........................ 802 -- -- (802) --
Minority interests:
Preferred redeemable securities....... -- -- (3,063) -- (3,063)
Other................................. -- -- 250 -- 250
---- -------- -------- ----- --------
Income (loss) before income taxes....... 802 1,625 (823) (802) 802
Provision (benefit) for income taxes.... 275 597 (322) (275) 275
---- -------- -------- ----- --------
Net income (loss)....................... $527 $ 1,028 $ (501) $(527) $ 527
==== ======== ======== ===== ========
</TABLE>
11
<PAGE> 14
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms................................. $ -- $53,082 $ 63,467 $ -- $116,549
Food and beverage..................... -- 13,835 18,057 -- 31,892
Other................................. -- 3,151 4,428 -- 7,579
----- ------- -------- ----- --------
Total revenues..................... -- 70,068 85,952 -- 156,020
----- ------- -------- ----- --------
Operating expenses:
Direct:
Rooms................................. -- 14,092 19,121 -- 33,213
Food and beverage..................... -- 10,237 13,573 -- 23,810
Other................................. -- 2,197 2,355 -- 4,552
General, administrative and other...... -- 23,857 25,007 -- 48,864
Depreciation and amortization.......... -- 3,866 9,236 -- 13,102
----- ------- -------- ----- --------
Total operating expenses........... -- 54,249 69,292 -- 123,541
----- ------- -------- ----- --------
-- 15,819 16,660 -- 32,479
Other income (expenses):
Interest income and other............. -- -- 285 -- 285
Interest expense...................... -- (8,420) (11,897) -- (20,317)
Equity in loss of consolidated
subsidiaries........................ (141) -- -- 141 --
Minority interests:
Preferred redeemable securities....... -- -- (3,338) -- (3,338)
Other................................. -- -- 1,310 -- 1,310
----- ------- -------- ----- --------
(Loss) income before income taxes and
extraordinary item.................... (141) 7,399 3,020 141 10,419
(Benefit) provision for income taxes... (57) 3,923 244 57 4,167
----- ------- -------- ----- --------
Net (loss) income before extraordinary
item.................................. (84) 3,476 2,776 84 6,252
Extraordinary item:
Loss on early extinguishment of debt,
net of income tax benefit of $4,224... -- (5,777) (559) -- (6,336)
----- ------- -------- ----- --------
Net (loss) income...................... $ (84) $(2,301) $ 2,217 $ 84 $ (84)
===== ======= ======== ===== ========
</TABLE>
12
<PAGE> 15
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms .................................. $ -- $148,723 $185,920 $ -- $334,643
Food and beverage ...................... -- 42,219 56,502 -- 98,721
Other .................................. -- 8,484 12,914 -- 21,398
-------- -------- -------- ------- --------
Total revenues................ -- 199,426 255,336 -- 454,762
-------- -------- -------- ------- --------
Operating expenses:
Direct:
Rooms .................................. -- 41,934 51,392 -- 93,326
Food and beverage ...................... -- 30,824 41,578 -- 72,402
Other .................................. -- 5,843 7,299 -- 13,142
General, administrative and other ........ -- 69,410 98,557 -- 167,967
Depreciation and amortization ............ -- 19,507 29,841 -- 49,348
Impairment of long-lived assets .......... -- 3,404 52,046 -- 55,450
Severance and restructuring charges ...... -- -- 1,502 -- 1,502
-------- -------- -------- ------- --------
Total operating expenses ..... -- 170,922 282,215 -- 453,137
-------- -------- -------- ------- --------
-- 28,504 (26,879) -- 1,625
Other income (expenses):
Interest income and other .............. -- -- 994 -- 994
Interest expense ....................... -- (42,120) (32,306) -- (74,426)
Interest hedge break fee ............... -- -- (4,294) -- (4,294)
Gain (loss) on asset dispositions, net.. -- 53 (77) -- (24)
Equity in loss of consolidated
subsidiaries ........................ (85,608) -- -- 85,608 --
Minority interests:
Preferred redeemable securities ........ -- -- (9,190) -- (9,190)
Other .................................. -- -- (293) -- (293)
-------- -------- -------- ------- --------
Loss before income taxes ................. (85,608) (13,563) (72,045) 85,608 (85,608)
Benefit for income taxes ................. (29,105) (4,567) (24,538) 29,105 (29,105)
-------- -------- -------- ------- --------
Net loss ................................. $(56,503) $ (8,996) $(47,507) $56,503 $(56,503)
======== ======== ======== ======= ========
</TABLE>
13
<PAGE> 16
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms..................................... $ -- $152,063 $176,149 $ -- $328,212
Food and beverage......................... -- 44,636 56,382 -- 101,018
Other..................................... -- 9,680 12,777 -- 22,457
------- -------- -------- -------- --------
Total revenues......................... -- 206,379 245,308 -- 451,687
------- -------- -------- -------- --------
Operating expenses:
Direct:
Rooms..................................... -- 39,184 51,151 -- 90,335
Food and beverage......................... -- 32,397 41,954 -- 74,351
Other..................................... -- 6,188 6,580 -- 12,768
General, administrative and other.......... -- 68,967 76,407 -- 145,374
Depreciation and amortization.............. -- 12,668 27,934 -- 40,602
------- -------- -------- -------- --------
Total operating expenses............... -- 159,404 204,026 -- 363,430
------- -------- -------- -------- --------
-- 46,975 41,282 -- 88,257
Other income (expenses):
Interest income and other................. -- -- 1,102 -- 1,102
Interest expense.......................... -- (23,518) (33,938) -- (57,456)
Equity in income of consolidated
subsidiaries............................. 11,191 -- -- (11,191) --
Minority interests:
Preferred redeemable securities........... -- -- (10,152) -- (10,152)
------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item........................ 11,191 23,457 (1,706) (11,191) 21,751
Provision (benefit) for income taxes....... 4,476 9,382 (682) (4,476) 8,700
------- -------- -------- -------- --------
Income (loss) before extraordinary item.... 6,715 14,075 (1,024) (6,715) 13,051
Extraordinary item:
Loss on early extinguishment of debt,
net of income tax benefit of $4,224....... -- (5,777) (559) -- (6,336)
------- -------- -------- -------- --------
Net income (loss).......................... $ 6,715 $ 8,298 $ (1,583) $ (6,715) $ 6,715
======= ======== ======== ======== ========
</TABLE>
14
<PAGE> 17
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................................... $ -- $ (8,996) $ (47,507) $ (56,503)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ....................... -- 19,507 29,841 49,348
Gain (loss) on asset dispositions, net .............. -- (53) 77 24
Deferred income tax provision (benefit) ............. (29,105) -- -- (29,105)
Minority interests .................................. -- -- 6,416 6,416
Impairment of long-lived assets ..................... -- 3,404 52,046 55,450
Other ............................................... 375 (28) (1,291) (944)
Changes in operating assets and liabilities:
Accounts receivable ................................. -- (3,916) 2,609 (1,307)
Inventories ......................................... -- 437 598 1,035
Other current assets ................................ -- (77) (1,425) (1,502)
Accounts payable .................................... -- 3,342 (11,015) (7,673)
Accrued liabilities ................................. -- 1,641 (6,554) (4,913)
-------- --------- --------- ---------
Net cash provided by (used in) operating
activities ........................................ (28,730) 15,261 23,795 10,326
-------- --------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures, net .......................... -- (43,539) (24,666) (68,205)
Proceeds from asset dispositions ................... -- 37,225 131,673 168,898
Net withdrawals (deposits) for capital
expenditures...................................... -- (3,645) 675 (2,970)
-------- --------- --------- ---------
Net cash provided by (used in) investing
activities ....................................... -- (9,959) 107,682 97,723
-------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
obligations ....................................... -- 30,000 2,326 32,326
Proceeds received from (paid to) related
parties ........................................... 28,730 (4,614) (24,116) --
Principal payments on long-term obligations ........ -- (18,537) (117,983) (136,520)
Payments of deferred loan costs .................... -- (1,400) (1,900) (3,300)
Contributions from (distributions to) minority
interests ......................................... -- -- (683) (683)
-------- --------- --------- ---------
Net cash provided by (used in) financing
activities ........................................ 28,730 5,449 (142,356) (108,177)
-------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ........................................ -- 10,751 (10,879) (128)
Cash and cash equivalents at beginning of
period ............................................. 59 9,910 4,675 14,644
-------- --------- --------- ---------
Cash and cash equivalents at end of period ........... $ 59 $ 20,661 $ (6,204) $ 14,516
======== ========= ========= =========
</TABLE>
15
<PAGE> 18
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................................... $ -- $ 8,298 $ (1,583) $ 6,715
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on extinguishment of debt ...................... -- 5,777 4,783 10,560
Depreciation and amortization ....................... -- 12,668 27,934 40,602
Deferred income tax provision ....................... 4,476 -- -- 4,476
Other ............................................... -- 11,246 (16,701) (5,455)
Changes in operating assets and liabilities:
Accounts receivable ................................. -- (11,977) (2,683) (14,660)
Inventories ......................................... -- 25 3 28
Other current assets ................................ 759 2,458 (23,163) (19,946)
Accounts payable .................................... (132) (8,343) (17,866) (26,341)
Accrued liabilities ................................. -- 17,121 (11,983) 5,138
-------- --------- --------- ---------
Net cash provided by (used in) operating
activities ........................................ 5,103 37,273 (41,259) 1,117
-------- --------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures, net .......................... -- (5,001) (58,658) (63,659)
Acquisition of property and equipment .............. -- -- (1,929) (1,929)
Purchase of minority interests ..................... -- -- (10,200) (10,200)
Proceeds from disposition of assets ................ -- -- 20,468 20,468
Other .............................................. -- -- 371 371
Net withdrawals (deposits) for capital
expenditures ..................................... -- 4,460 23,277 27,737
-------- --------- --------- ---------
Net cash provided by (used in) investing
activities ....................................... -- (541) (26,671) (27,212)
-------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
obligations ...................................... -- -- 477,860 477,860
Proceeds received from (paid to) related
parties .......................................... (6,692) 187,154 (180,462) --
Net proceeds from issuance of common stock ......... -- -- 120 120
Principal payments on long-term obligations ........ -- (252,846) (189,453) (442,299)
Payments of deferred loan costs .................... -- -- (4,699) (4,699)
Contributions from (distributions to) minority
interests ........................................ -- -- (690) (690)
-------- --------- --------- ---------
Net cash provided by (used in) financing
activities ........................................ (6,692) (65,692) 102,676 30,292
-------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ......................................... (1,589) (28,960) 34,746 4,197
Cash and cash equivalents at beginning of
period .............................................. 1,648 7,140 10,397 19,185
-------- --------- --------- ---------
Cash and cash equivalents at end of period ........... $ 59 $ (21,820) $ 45,143 $ 23,382
======== ========= ========= =========
</TABLE>
16
<PAGE> 19
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FACTORS AFFECTING BUSINESS
During the past twelve months, the Company's Board of Directors has
adopted strategic plans that are intended to enhance value for its
shareholders. At the end of 1999 the Company adopted a strategic plan to reduce
the size of the Company's non-core hotel portfolio. In 2000, the Company
adopted a strategic plan to reduce the level of overall debt of the Company and
retained an investment banker to review its strategic alternatives. As part of
that review the Company is pursuing a sale of the Company. With regard to this
strategic alternative the Company had received offers from Whitehall Street
Real Estate Partnership ("Whitehall") and Edgecliff Holdings, LLC ("Edgecliff")
to acquire the Company. On December 26, 2000, the Company entered into an
Exclusivity Agreement with Edgecliff. Under the terms of the Exclusivity
Agreement the Company has granted Edgecliff an exclusive 60-day period during
which the two parties will attempt to negotiate a definitive agreement, and
Edgecliff will complete its due diligence review; Edgecliff has agreed not to
make an offer to purchase the Company at any time during the next 12 months for
less than $4.75 per share; Lodgian may continue to sell specified assets during
the exclusivity period; Lodgian is permitted to consider other unsolicited
offers for the Company if the Lodgian board concludes that such offers are
superior to Edgecliff's proposal; and the Company is not obligated to reimburse
Edgecliff for any of its expenses, nor is the Company obligated to pay any
break-up fee should the Company pursue another transaction. During the fourth
quarter, per the October 12, 2000 exclusivity agreement with Whitehall, the
Company recorded a charge of $3.5 million relating to reimbursing Whitehall
the expenses it incurred in connection with evaluating and pursuing the
transaction. The Company is unable to predict whether the Exclusivity Agreement
entered into with Edgecliff will ultimately result in an actual sale of the
Company.
In July 1999, the Company sold $200 million of Notes. In addition, the
Company entered into a new, multi-tranche senior secured loan credit facility.
The facility consists of development loans with a maximum capacity of $75
million (the tranche A and C loans), a $240 million tranche B term loan and a
$50 million revolving credit facility. The tranche A and C loans will be used
for hotel development projects. The tranche B loan, along with the proceeds
from the Notes was used to repay the loan from Lehman Brothers Holding, Inc.,
("Lehman") and, in September, a $132.5 million loan (one of three facilities)
from Nomura Asset Capital Corporation. These financings contain various
financial covenants, coverage ratios and payment restrictions with which the
Company was in compliance at September 30, 2000 or which have been waived by
the lenders. Payment restrictions contained in the Company's Notes required the
Company to defer dividend payments with respect to the CRESTS beginning June 30,
2000. Pursuant to the terms of the agreement the Company has the right to defer
the dividend payment for up to 20 quarters. The Company does not anticipate
resumption of the quarterly dividend payment on the CRESTS in the near
future.
The Company was unable to deliver its 1999 annual audited and March 31,
and June 30, 2000 quarterly unaudited financial statements to its Senior
Secured loan facility lenders on a timely basis. The Company has received a
waiver for the late delivery of these financial statements and the time period
for delivery of quarterly 2000 financial statements has been extended. In
addition, on July 31, 2000, the Company entered into an amendment to its Senior
Secured loan credit facility which provides for a 0.50% increase in the interest
rate, termination of the tranche A facility which reduces the maximum credit
facility by $25 million and provides for additional amortization payment
requirements for tranche B term loans of (i) $25 million on or prior to
December 31, 2000, (ii) an additional $35 million on or prior to June 30, 2001
and (iii) an additional $40 million on or prior to December 31, 2001. Prior to
the amendment, amortization payment requirements were effectively 1% per year
of the outstanding tranche B term loans during that period. The amendment
modifies various covenants and coverage ratios, with which the Company believes
it is in compliance or which have been waived by the lenders. The amendment
provides for immediate access to the $25 million unused portion of the
revolving credit facility and provides increased flexibility for the sale of
hotel assets. The Company paid an amendment fee of approximately $1.4 million.
As of December 31, 2000 the Company has paid fully the $25 million required
amortization payment due December 31, 2000 and has paid approximately $10.2
17
<PAGE> 20
million of the $35 million required amortization payment due June 30, 2001.
The Company has adopted strategic plans to reduce the size of the
Company's non-core hotel portfolio and reduce the overall level of debt. With
regard to these strategic plans the Company has sold nineteen hotel properties
and four other assets from January 1, to December 31, 2000. Gross sales price of
these twenty three properties was $209.1 million while the reduction of debt was
$154.9 million. The balance was used primarily to support capital expenditures
related to major renovation projects and the construction of one new hotel.
The Company will continue to explore potential property sale
transactions in addition to those discussed above. Certain of these transactions
include hotels other than those identified for sale currently. The discussions
with potential purchasers are in various stages, including the execution of
preliminary agreements in a few situations. Those transactions where preliminary
agreements have been reached are subject to, among other things, buyer due
diligence and financing and the cooperation of the Company's existing lenders.
Accordingly, the Company is unable to predict whether any of the transactions
being considered will result in an actual sale. The majority of the net proceeds
from any completed sales will be used to reduce debt.
In June 2000, the Company in an effort to reduce corporate overhead
expenses instituted a plan to close four of the six regional offices, close the
Company's reservation center located in Baton Rouge, Louisiana and eliminate
certain positions in the corporate office. Approximately 65 employees were
terminated in this restructuring. The Company recognized a charge of
approximately $1.5 million at June 30, 2000 to implement this plan. Of the $1.5
million charge approximately $1.3 million was related to salary and benefits of
the terminated employees and $.2 million related to the costs of closing the
physical regional offices and the reservation center. During the third and
fourth quarters of 2000 $1.3 million and $.2 million was charged against this
accrual, respectively.
On August 31, 2000, in conjunction with the sale of ten hotels,
principally located in the Western United States, the Company and the lenders
amended the terms of the credit facilities totaling $213 million at December 31,
1999. Under this amendment two former credit facilities were amended into one
new facility and the Company paid down approximately $106 million of the debt
with proceeds from the sale, extended the maturity date to November 30, 2002
from November 30, 2000 and converted the remaining balance owed, approximately
$107 million, to a floating rate facility. In addition, the Company paid
approximately $4.3 million to "break" the interest rate lock agreement on $54
million related to this debt. Under the original terms of the loan agreement
when the loan matured in November 2000 and converted to a term loan, the
interest rate would be based on a benchmark treasury rate of 7.235%.
Considering the amendments to the existing loan agreements and the debt
repayments discussed above, the Company's total outstanding debt as of December
31, 2000 (excluding CRESTS) is approximately $754.5 million. Of this amount
$80.0 million is due in 2001. As of December 31, 2000, the Company's held for
sale properties have an estimated fair value of approximately $49.4 million,
which are encumbered by indebtedness of approximately $7.9 million due
subsequent to 2001.
In 2001, the Company will need to sell assets and therefore will
continue to identify properties to be classified as held for sale to meet its
$80.0 million amortization payment requirements in 2001 and its capital
improvement program, as discussed in Item 2. Liquidity and Capital Resources
section following. Although the Company anticipates being able to sell
sufficient assets to meet its obligations in 2001, there can be no assurances
that the sales will occur or generate sufficient net proceeds to meet these
obligations.
18
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below and elsewhere in this Form 10-Q includes
statements that are "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These
include statements that describe anticipated revenues, capital expenditures and
other financial items, statements that describe the Company's business plans and
objectives, and statements that describe the expected impact of competition,
government regulation, litigation and other factors on the Company's future
financial condition and results of operations. The words "may," "should,"
"expect," "believe," "anticipate," "project," "estimate," and similar
expressions are intended to identify forward-looking statements. Such risks and
uncertainties, any one of which may cause actual results to differ materially
from those described in the forward-looking statements, include or relate to,
among other things:
- The impact of pending or threatened litigation and/or governmental
inquiries and investigation involving the Company.
- The Company's ability to significantly improve and stabilize its
accounting systems and procedures and maintain stability.
- The uncertainties relating to the Company's proposed strategic
initiatives, including the willingness of prospective purchasers to
purchase the hotels the Company has identified as divestiture
candidates on terms the Company finds acceptable, the timing and
terms on which such hotels may be sold, and other factors affecting
the ability of prospective purchasers to consummate such
transactions, including the availability of financing.
- The effect of competition on the Company's ability to maintain
margins on existing operations, including uncertainties relating to
competition.
- The impact on operations due to renovation work being performed at
certain hotels.
- The Company's ability to generate sufficient cash flows from
operations to cover its cash needs, the Company's ability to obtain
additional capital if needed and the possible default under credit
facilities if cash flows are lower than expected or capital
expenditures are greater than expected.
- The effectiveness of changes in management and the ability of the
Company to retain qualified individuals to serve in senior management
positions.
- The potential for additional impairment charges against earnings
related to long-lived assets which may result from the Company's
strategic initiatives to reduce the size of the hotel portfolio and
reduce debt.
- The impact of termination of letters of intent from prospective
buyers of the Company as a whole.
STRATEGIC PLANS
During the past twelve months, the Company's Board of Directors have
adopted strategic plans that are intended to enhance value for its
shareholders. At the end of 1999 the Company adopted a strategic plan to reduce
the size of the Company's non-core hotel portfolio. In 2000, the Company
adopted a strategic plan to reduce the level of overall debt of the Company and
retained an investment banker to review its strategic alternatives. As part of
that review the Company is pursuing a sale of the Company. With regard to this
strategic alternative the Company had received offers from Whitehall and
Edgecliff to acquire the Company. On December 26, 2000, the Company entered
into an Exclusivity Agreement with Edgecliff in which the Company has granted
Edgecliff an exclusive 60-day period during which the two parties will attempt
to negotiate a definitive agreement, and Edgecliff will complete its due
diligence review. In addition, during the fourth quarter, the Company recorded
a charge of $3.5 million relating to reimbursing Whitehall the expense it
19
<PAGE> 22
incurred in connection with evaluating and pursuing the transaction. The
Company is unable to predict whether the Exclusivity Agreement entered into will
ultimately result in an actual sale of the Company. See further discussion in
Liquidity and Capital Resources following.
With regard to the strategic plans to reduce the size of the Company's
non-core hotel portfolio and reduce the level of overall debt of the Company,
the Company has sold nineteen hotel properties and four other assets from
January 1, to December 31, 2000. Gross sale price of these twenty three
properties was $209.1 million while the reduction of debt was $154.9 million.
The balance was used primarily to support capital expenditures related to major
renovation projects and the construction of one new hotel. In addition, the
Company has several additional assets under contract and scheduled for closing
during 2001. See further discussion in Liquidity and Capital Resources
following.
OVERVIEW
Management believes that results of operations in the hotel industry
are best explained by four key performance measures: occupancy levels, average
daily rate ("ADR"), revenue per available room ("RevPAR") and Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") margins. These
measures are influenced by a variety of factors including national, regional and
local economic conditions, the degree of competition with other hotels in the
area and changes in travel patterns. The demand for accommodations is also
affected by normally recurring seasonal patterns and most of our hotels
experience lower occupancy levels in the fall and winter months (November
through February) which may result in lower revenues, lower net income and less
cash flow during these months.
Our business strategy included the acquisition of underperforming
hotels and the implementation of our operational initiatives and repositioning
and renovation programs to achieve revenue and margin improvements. Such
initiatives typically require a 12 to 18 month period before newly acquired,
underperforming hotels are repositioned and stabilized. During this period, the
revenues and earnings of these hotels may be adversely affected and may have a
negative impact on RevPAR, average daily rate and occupancy rate performance, as
well as operating margins for the Company overall. In addition, our strategy
also included developing new full service hotels. Newly developed properties
typically require 24 months following completion to stabilize. To track the
execution of our repositioning and development growth strategy's impact on the
Company's results of operations, we classify our hotels as either "Stabilized
Hotels," "Stabilizing Hotels" or "Being Repositioned Hotels," as described
below:
Stabilized Hotels are properties which have experienced little or no
disruption to their operations over the past 24 to 36 months as the result of
redevelopment or repositioning efforts or newly-constructed hotels which have
been in service for 24 months or more.
Stabilizing Hotels are (1) properties which have undergone renovation
or repositioning investment within the last 36 months, which work is now
completed, or (2) newly developed properties placed into service within the past
24 months. Management believes that these properties should experience
higher rates of growth in RevPAR and operating margin than the Stabilized
Hotels. On average, our hotels which have undergone renovation have generally
reached stabilization within approximately 12 to 18 months after their
completion date, and our newly developed hotels have reached stabilization
in approximately 24 months after their completion date.
Being Repositioned Hotels are hotels experiencing disruption to their
operations due to renovation and repositioning. During this period (generally 12
to 18 months) hotels will usually experience lower operating results, such as
RevPAR, and operating margins. We expect significant improvements in the
operating performance of those hotels which have undergone repositioning once
the renovation is completed. After the reposition work is completed these
properties will be reclassified as Stabilizing Hotels.
20
<PAGE> 23
Management classifies each hotel into one of the three categories at
the beginning of each fiscal year. Management will determine the category most
appropriate for each hotel based on its evaluation of objective and subjective
factors, including the time of completion of renovation and whether the full
benefit of renovations have been realized.
21
<PAGE> 24
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999
HISTORICAL RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the period to
period change in dollars (in thousands) and percentages for the various
consolidated statements of operations line items.
<TABLE>
<CAPTION>
PERIOD TO PERIOD PERIOD TO PERIOD
CHANGE FOR THE THREE CHANGE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 SEPTEMBER 30, 2000 AND 1999
--------------------------- ---------------------------
(UNAUDITED)
Favorable/(unfavorable)
<S> <C> <C> <C> <C>
Revenues:
Rooms...................................................... $ 876 0.8% $ 6,431 2.0%
Food and beverage.......................................... (1,120) (3.5) (2,297) (2.3)
Other...................................................... (572) (7.5) (1,059) (4.7)
------- ------ --------- ------
Total revenues....................................... (816) (0.5) 3,075 0.7
------- ------ --------- ------
Operating expenses:
Direct:
Rooms...................................................... 386 1.2 (2,991) (3.3)
Food and beverage.......................................... 91 0.4 1,949 2.6
Other...................................................... 327 7.2 (374) (2.9)
General, administrative and other............................ (7,314) (15.0) (22,593) (15.5)
Depreciation and amortization................................ (3,806) (29.0) (8,746) (21.5)
Impairment of long-lived assets.............................. 10,712 100.0 (55,450) (100.0)
Severance and restructuring expenses......................... -- 0.0 (1,502) (100.0)
------- ------ --------- ------
Total operating expenses............................. 396 0.3 (89,707) (24.7)
------- ------ --------- ------
(420) (1.3) (86,632) (98.2)
Other income/expenses:
Interest income and other.................................. 182 63.9 (108) (9.8)
Interest expense........................................... (4,279) (21.1) (16,970) (29.5)
Interest hedge break fee................................... (4,294) (100.0) (4,294) (100.0)
Loss on asset dispositions, net............................ (21) (100.0) (24) (100.0)
Minority interests:
Preferred redeemable securities............................ 275 8.2 962 9.5
Other...................................................... (1,060) (80.9) (293) (100.0)
------- ------ --------- ------
Income/loss before income taxes and extraordinary item....... (9,617) (92.3) (107,359) (493.6)
Provision/benefit for income taxes........................... 3,892 93.4 37,805 434.5
------- ------ --------- ------
Income/loss before extraordinary item........................ (5,725) (91.6) (69,554) (532.9)
Extraordinary item:
Loss on early extinguishment of debt, net of income tax
benefit of $4,224.......................................... 6,336 100.0 6,336 100.0
------- ------ --------- ------
Net income/loss.............................................. $ 611 727.4% $ (63,218) (941.4)%
======= ====== ========= ======
</TABLE>
22
<PAGE> 25
The following table presents for the periods indicated, the percentage
relationship that the various statements of operations line items bear to
operating revenues:
LODGIAN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Rooms......................................... 75.7% 74.7% 73.6% 72.7%
Food and beverage............................. 19.8 20.4 21.7 22.3
Other......................................... 4.5 4.9 4.7 5.0
----- ----- ----- -----
Total revenues............................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Direct:
Rooms......................................... 21.2 21.3 20.5 20.0
Food and beverage............................. 15.3 15.3 15.9 16.5
Other......................................... 2.7 2.9 2.9 2.8
General, administrative and other.............. 36.2 31.3 36.9 32.2
Depreciation and amortization.................. 10.9 8.4 10.9 9.0
Impairment of long-lived assets................ (6.9) 0.0 12.2 0.0
Severance and restructuring expenses........... 0.0 0.0 0.3 0.0
----- ----- ----- -----
Total operating expenses.................. 79.4 79.2 99.6 80.5
----- ----- ----- -----
20.6 20.8 0.4 19.5
Other income (expenses):
Interest income and other..................... 0.3 0.2 0.2 0.2
Interest expense.............................. (15.8) (13.0) (16.4) (12.7)
Interest hedge break fee...................... (2.8) 0.0 (0.9) 0.0
Loss on asset dispositions, net............... 0.0 0.0 0.0 0.0
Minority interests:
Preferred redeemable securities............... (2.0) (2.1) (2.0) (2.2)
Other......................................... 0.2 0.8 (0.1) 0.0
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item............................ 0.5 6.7 (18.8) 4.8
Provision (benefit) for income taxes........... 0.2 2.7 (6.4) 1.9
----- ----- ----- -----
Income (loss) before extraordinary item........ 0.3 4.0 (12.4) 2.9
Extraordinary item:
Loss on early extinguishment of debt, net
of income tax benefit of $4,224............... 0.0 (4.1) 0.0 (1.4)
----- ----- ----- -----
Net income (loss).............................. 0.3% (0.1)% (12.4)% 1.5%
===== ===== ===== =====
</TABLE>
23
<PAGE> 26
As previously reported in the Company's Form 10-K for the year ended
December 31, 1999, during the fourth quarter of 1999, the Company initiated an
internal review of its accounting records. The Company experienced significant
difficulty in the integration and conversion of information and accounting
systems subsequent to the Merger. In addition, the Company determined that a
significant number of reconciliations involving cash, accounts receivable, fixed
assets, accounts payable and other accounts had not been completed during 1999.
As a result of these systems and reconciliation issues, the Company experienced
a significant delay in preparing its 1999 annual financial statements. Certain
charges were recorded in the fourth quarter of 1999 after the account
reconciliation process was completed in 2000.
Also, as previously reported in the Company's Form 10-K for the year
ended December 31, 1999, the Company concluded, after consultation with its
prior independent auditors that its internal controls for the preparation of
interim financial information did not provide an adequate basis for its prior
independent auditors to complete reviews of the 1999 quarterly financial
information in accordance with standards established by the American Institute
of Certified Public Accountants. The Company believes that certain charges that
were recorded in the fourth quarter of 1999 and were principally recognized in
general, administrative and other in the consolidated statements of operations
may relate to individual prior quarters; however the Company does not have
sufficient information to identify all specific charges attributable to prior
1999 quarters.
In the opinion of management, the internal control weaknesses
described above existed during the first and second quarters of 2000 and to a
lesser extent in the third quarter of 2000. These internal control weaknesses
caused a significant delay in preparing the Company's September 30, 2000 Form
10-Q. The Company has committed substantial resources to mitigate the
previously identified control weaknesses including contracting with outside
consulting accountants to ensure the Company has the corporate financial
resources needed to provide reasonable assurances that it can comply with the
record keeping and internal control requirements applicable to SEC registrants.
Management believes these efforts have enabled the Company to produce reliable
interim financial statements as of September 30, 2000 and for the three and
nine months then ended. The Company is in the process of implementing a plan
which, if successful, will enable the Company to timely comply with the
financial statement reporting requirements applicable to SEC registrants by the
time it is required to file its 2000 annual financial statements and will have
substantially developed and implemented an adequate control environment by this
date. As part of this plan, during the third and fourth quarters the Company
has implemented the following action steps; (i) developed and implemented
numerous new controls and policies, (ii) implemented a process to insure that
material transactions are recorded on a timely basis, (iii) implemented an
account closing process so that all material accounts are reconciled and
reviewed on a timely basis and (iv) reorganized and changed personnel in the
accounting and finance functions to improve the accuracy and timeliness of the
financial accounting processes.
THREE MONTHS ENDED SEPTEMBER 30, 2000 ("THIRD QUARTER 2000") COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1999 ("THIRD QUARTER 1999")
REVENUES
Revenues are composed of room, food and beverage and other revenues.
Room revenues are derived from guest room rentals, whereas food and beverage
revenues primarily include sales from our hotel restaurants, room service and
hotel catering. Other revenues include charges for guests' long-distance
telephone service, laundry service, use of meeting facilities and fees earned
by the Company for services rendered in conjunction with managed properties.
Total revenue for the third quarter 2000 was $155.2 million, a
decrease of 0.5% and RevPAR was $55.30, an increase of 6.5%, compared to 1999,
despite a decrease of nineteen hotels in the owned portfolio.
24
<PAGE> 27
The following table summarizes certain operating data for the Company's
hotels for the three months ended September 30, 2000 and 1999. The Stabilized,
Stabilizing and Being Repositioned Hotels refers to classifications in these
respective categories as of January 1 of the year indicated.
<TABLE>
<CAPTION>
HOTELS(1) ADR OCCUPANCY REVPAR
----------- -------------- ------------- --------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ------ ------ ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stabilized................ 91 77 $73.46 $73.13 70.05% 71.00% $51.45 $51.92
Stabilizing............... 6 35 92.32 75.22 77.56 67.70 71.60 50.94
Being repositioned........ 18 22 89.84 80.12 70.80 66.50 63.60 53.32
--- --- ------ ------ ----- ----- ------ ------
Total................. 115 134 $78.12 $74.89 70.79% 69.30% $55.30 $51.93
=== === ====== ====== ===== ===== ====== ======
</TABLE>
----------------
(1) Excludes the hotel managed for a third party and the partially owned non-
consolidated hotel.
OPERATING EXPENSES
Operating expenses are composed of direct, general and administrative,
other hotel operating expenses and depreciation and amortization. Direct
expenses, including both rooms and food and beverage operations, reflect
expenses directly related to hotel operations. These expenses are primarily
variable with available rooms and occupancy rates, but also have a small fixed
component which can be leveraged with increases in revenues. General and
administrative expenses represent corporate salaries and other corporate
operating expenses and are generally fixed. The Company has incurred significant
professional fees in 2000 to correct internal control weaknesses identified in
late 1999. Other expenses include primarily property level expenses related to
general operations such as marketing, utilities, repairs and maintenance and
other property administrative costs. These expenses are primarily fixed.
Direct operating expenses for the Company were $60.8 million (39.2% of
direct revenues) for the third quarter 2000 and $61.6 million (39.5% of direct
revenues) for the third quarter of 1999. This $0.8 million decrease was
primarily attributable to the $0.8 million decrease in direct revenues.
General, administrative and other expenses were $56.2 million in the
third quarter 2000 and $48.9 million in the third quarter 1999. Included in
the $7.3 million increase is $2.0 million of professional fees that the
Company expended in its effort to reconcile accounts and to improve its
accounting systems and procedures.
Depreciation and amortization were $16.9 million in third quarter 2000
and $13.1 million in the third quarter 1999. The $3.8 million increase is
primarily as a result of the completion of a significant number of renovation
projects and the opening of three hotels in the latter part of 1999 as well as
in the first quarter of 2000, offset by a decrease in depreciation related
to hotels sold. In addition, as of September 30, 2000 the Company
recorded depreciation expense of $1.6 million representing nine months of
expense related to the seven hotels previously considered held for sale as of
December 31, 1999 and that are no longer being actively marketed for sale
as of September 30, 2000.
During the third quarter 2000 the Company recaptured $10.7
million of impairment charges recorded in 1999 and 2000 as seven hotels
previously considered held for sale as of December 31, 1999 are no longer
being actively marketed for sale.
Interest expense was $24.6 million in third quarter 2000 and $20.3
million in third quarter 1999. This increase is primarily attributable to an
increase in the level of debt throughout 2000 as well as an increase in the cost
of debt offset by approximately $121.1 million of debt repayments occurring late
in the third quarter 2000.
25
<PAGE> 28
During the third quarter 2000 the Company paid a $4.3 million interest
hedge break fee to break the interest rate lock agreement on one of its credit
facilities.
Minority interest expense was $2.8 million in third quarter 2000 and
$2.0 million in third quarter 1999. The $0.8 million increase is primarily
attributable to higher net income levels for those hotels which the Company
co-owns with its third-party-minority equity partners.
NET INCOME (LOSS)
After a provision for income taxes of $0.3 million and $4.2 million in
third quarter 2000 and third quarter 1999, respectively, the Company had income
before extraordinary item of $0.5 million ($0.02 per share) in the third quarter
2000 compared with $6.3 million ($.23 per share) in third quarter 1999.
In third quarter 1999 the Company had an extraordinary item, net of
income tax benefit of $4.2 million, of $6.3 million ($.23 loss per share) from
the loss on early extinguishment of debt.
Net income for the third quarter 2000 amounted to $0.5 million ($0.02
per share) compared with a net loss of ($0.1) million ($.00 per share) in third
quarter 1999, for the reasons discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 (THE "2000 PERIOD") COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 (THE "1999 PERIOD")
REVENUES
Revenues for the Company were $454.8 million for the 2000 period, a
0.7% increase over revenues of $451.7 million for the 1999 period and RevPAR was
$51.05, an increase of 4.7%, despite a decrease of nineteen hotels in the owned
portfolio.
The following table summarizes certain operating data for the Company's
hotels for the Nine Months ended September 30, 2000 and 1999. The Stabilized,
Stabilizing and Being Repositioned Hotels refers to classifications in these
respective categories as of January 1 of the year indicated.
<TABLE>
<CAPTION>
HOTELS(1) ADR OCCUPANCY REVPAR
----------- -------------- ------------- --------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ------ ------ ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stabilized................ 91 77 $73.35 $74.07 67.78% 68.20% $49.72 $50.50
Stabilizing............... 6 35 87.72 75.44 66.01 63.40 57.90 47.83
Being repositioned........ 18 22 86.62 79.13 61.50 56.50 53.27 44.68
--- --- ------ ------ ----- ----- ------ ------
Total................. 115 134 $76.75 $75.23 66.52% 64.80% $51.05 $48.75
=== === ====== ====== ===== ===== ====== ======
</TABLE>
----------------
(1) Excludes the hotel managed for a third party and the partially owned non-
consolidated hotel.
OPERATING EXPENSES
Direct operating expenses for the Company were $178.9 million (39.3%
of direct revenues) for the 2000 period and $177.5 million (39.3% of direct
revenue) for the 1999 period. This $1.4 million increase was primarily
attributable to the $3.1 million increase in direct revenues.
General administrative and other expenses were $168.0 million in the
2000 period and $145.4 million in the 1999 period. Included in the $22.6 million
26
<PAGE> 29
increase is $5.8 million of professional fees that the Company expended in its
effort to reconcile accounts and to improve its accounting systems and
procedures.
Depreciation and amortization expense was $49.3 million in the 2000
period and $40.6 million in the 1999 period. The $8.7 million increase is
primarily a result of the completion of a significant number of renovation
projects and the opening of 3 hotels in the latter part of 1999 as well as in
the first quarter of 2000, offset by a decrease in depreciation related to
hotels sold. In addition, as of September 30, 2000 the Company recorded
depreciation expense of $1.6 million representing nine months of expense
related to the seven hotels previously considered held for sale as of December
31, 1999 and that are no longer being actively marketed for sale as of
September 30, 2000.
Impairment of long-lived assets was $55.5 million in the 2000 period,
consisting of $9.6 million and $56.6 million in the first and second quarters,
respectively. The first quarter charge related to revised estimates of fair
value for properties held for sale at December 31, 1999 and the second quarter
charge related to the ten hotels sold to Sunstone Investors, LLC on August 31,
2000. During the third quarter 2000 the Company recaptured $10.7 of impairment
charges recorded in 1999 and 2000 as seven hotels previously considered held
for sale as of December 31, 1999 are no longer being actively marketed for sale.
Interest expense was $74.4 million in the 2000 period and $57.5
million in the 1999 period. This increase is primarily attributable to an
increase in the level of debt throughout 2000 as well as an increase in the
cost of debt offset by approximately $121.1 million of debt repayments occurring
late in the third quarter 2000.
During the third quarter the Company paid a $4.3 million interest hedge
break fee to break the interest rate lock agreement on one of its credit
facilities.
Minority interest expense was $9.5 million in the 2000 period and
$10.2 million in the 1999 period. This $0.7 million decrease is primarily
attributable to higher net income levels for those hotels which the Company
co-owns with its third-party-minority equity partners.
NET INCOME
After a benefit for income taxes of $29.1 million in the 2000 period
and provision for income taxes of $8.7 million in the 1999 period, the Company
had a loss before extraordinary item of $56.5 million ($2.01 loss per share) in
the 2000 period compared with income before extraordinary item of $13.1 million
($0.48 per share) in the 1999 period.
In the 1999 period the Company had an extraordinary item, net of
income tax benefit of $4.2 million of $6.3 million ($.23 loss per share) from
the loss on early extinguishment of debt.
Net loss for the 2000 period amounted to $56.5 million ($2.01 loss per
share) compared with net income of $6.7 million ($0.25 per share) for the 1999
period, for the reasons discussed above.
INCOME TAXES
As of December 31, 1999, Lodgian had net operating loss carryforwards
of approximately $90.3 million for federal income tax purposes, which expire in
2005 through 2018. The Company's ability to use these net operating loss
carryforwards to offset future income is subject to certain limitations, and
may be subject to additional limitations in the future. Due to these
limitations, a portion or all of these net operating loss carryforwards could
expire unused.
LIQUIDITY AND CAPITAL RESOURCES
Lodgian's principal sources of liquidity consist of existing cash
balances, cash flow from operations and financing. Additionally, the Company
expects to generate cash from the disposition of hotels it has targeted for
sale and that will be targeted for sale in the future. The majority of net
proceeds from the sale of hotels is expected to be used to reduce long-term
debt.
The Company had earnings from operations before interest, taxes,
depreciation and amortization ("EBITDA"), as adjusted in 2000 of $116.7
million, a 10.1% decrease from the $129.8 million for the 1999 period. The
Company has computed EBITDA without regard to the unusual items and
non-recurring charges. During 2000 these items consisted of unusual costs,
principally professional fees and restructuring costs, of $10.3 million and
impairment charges of $55.5 million. There were no such items recorded during
27
<PAGE> 30
the first nine months of 1999. EBITDA is a widely regarded industry
measure of lodging performance used in the assessment of hotel property
values, although EBITDA is not indicative of and should not be used as an
alternative to net income or net cash provided by operations as specified by
generally accepted accounting principles.
Cash flows provided by (used in) in investing activities were $97.7
million and ($27.2) million in 2000 and 1999, respectively. The 2000 amount
includes capital expenditures of $68.2 million, net proceeds from the sale of
assets of $168.9 million and deposits for capital expenditure escrows of $3.0
million. The 1999 amount includes capital expenditures of $63.6 million, net
proceeds from the sale of assets of $20.5 million, withdrawals from capital
expenditure escrows of $27.7 million, additions of property and equipment of
$1.9 million, purchase of minority interest of $10.2 million and other items of
$.4 million.
Cash flows provided by (used in) financing activities were ($108.2)
million and $30.3 million in 2000 and 1999, respectively. The 2000 and 1999
amounts consist primarily of the net proceeds from the issuance and repayment
of long-term obligations.
At September 30, 2000, the Company had a working capital deficit of
$93.4 million as compared with a working capital deficit of $65.3 million at
December 31, 1999. The increase in the deficit is primarily attributable to the
$42.4 million increase in the current portion of long-term obligations.
At September 30, 2000, long-term obligations were $710.4 million.
Long-term obligations were $856.7 million at December 31, 1999. Both periods
exclude the CRESTS.
The Company has a capital improvement program to address the capital
improvements required at the hotels related to product improvement plans
specified by license agreements with franchisors, re-branding of several hotels
and general renovation projects intended to ultimately improve the operations
of the hotels. As of December 31, 2000, the Company's capital budget for 2001
is approximately $53.3 million and the Company has approximately $14.7 million
escrowed for such improvements.
In connection with the Merger on December 11, 1998, the Company
obtained $265 million of mortgage notes from Lehman. The net proceeds were used
to repay existing debt and related obligations.
In July 1999, the Company sold $200 million of Notes. In addition, the
Company entered into a new, multi-tranche senior secured loan credit facility.
The facility consists of development loans with a maximum capacity of $75
million (the tranche A and C loans), a $240 million tranche B term loan and a
$50 million revolving credit facility. The tranche A and C loans will be used
for hotel development projects. The tranche B loan, along with the proceeds
from the Notes was used to repay the Lehman loan and, in September, a $132.5
million loan (one of three facilities) from Nomura Asset Capital Corporation.
These financings contain various financial covenants, coverage ratios and
payment restrictions with which the Company was in compliance at September 30,
2000 or which have been waived by the lenders. Payment restrictions contained
in the Company's Notes required the Company to defer dividend payments with
respect to the CRESTS beginning June 30, 2000. Pursuant to the terms of the
agreement the Company has the right to defer the dividend payment for up to
twenty quarters. The Company does not anticipate resumption of the quarterly
dividend payment on the CRESTS in the near future.
The Company was unable to deliver its 1999 annual audited and
quarterly 2000 unaudited financial statements to its Senior Secured loan
facility lenders on a timely basis. The Company has received a waiver for the
late delivery of these financial statements and the time period for delivery of
quarterly 2000 financial statements has been extended. In addition, on July 31,
2000, the Company entered into an amendment to its Senior Secured loan credit
facility which provides for a 0.50% increase in the interest rate, termination
of the tranche A facility which reduces the maximum credit facility by $25
million and provides for additional amortization payment requirements for
tranche B term loans of (i) $25 million on or prior to December 31, 2000, (ii)
an additional $35 million on or prior to June 30, 2001 and (iii) an additional
$40 million on or prior to December 31, 2001. Prior to the amendment,
amortization payment requirements were effectively 1% per year of the
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outstanding tranche B term loans during that period. The amendment modifies
various covenants and coverage ratios, with which the Company believes it is
in compliance or which have been waived by the lenders. The amendment
provides for immediate access to the $25 million unused portion of the
revolving credit facility and provides increased flexibility for the sale of
hotel assets. The Company paid an amendment fee of approximately $1.4 million.
As of December 31, 2000 the Company has paid fully the $25 million required
amortization payment due December 31, 2000 and has paid approximately $10.2
million of the $35 million required amortization payment due June 30, 2001.
As discussed previously in Item 2, the Company has adopted strategic
plans to reduce the size of the Company's non-core hotel portfolio and reduce
the overall level of debt. With regard to these strategic plans the Company has
sold nineteen hotel properties and four other assets from January 1, to
December 31, 2000. Gross sales price of these twenty three properties was
$209.1 million while the reduction of debt was $154.9 million. The balance was
used primarily to support capital expenditures related to major renovation
projects and the construction of one new hotel.
The Company will continue to explore potential property sale
transactions in addition to those discussed above. Certain of these
transactions include hotels other than those identified for sale currently. The
discussions with potential purchasers are in various stages, including the
execution of preliminary agreements in a few situations. Those transactions
where preliminary agreements have been reached are subject to, among other
things, buyer due diligence and financing and the cooperation of the Company's
existing lenders. Accordingly, the Company is unable to predict whether any of
the transactions being considered will result in an actual sale. The majority
of the net proceeds from any completed sales will be used to reduce debt.
In June 2000, the Company in an effort to reduce corporate overhead
expenses instituted a plan to close four of the six regional offices, close
the Company's reservation center located in Baton Rouge, Louisiana and
eliminate certain positions in the corporate office. Approximately 65 employees
were terminated in this restructuring. The Company recognized a charge of
approximately $1.5 million at June 30, 2000 to implement this plan. Of the $1.5
million charge approximately $1.3 million was related to salary and benefits of
the terminated employees and $.2 million related to the costs of closing the
physical regional offices and the reservation center. During the third and
fourth quarters of 2000 $1.3 million and $.2 million was charged against this
accrual, respectively. In the future the Company anticipates approximately $5
million in annual savings from instituting this plan.
On August 31, 2000, in conjunction with the sale of ten hotels,
principally located in the Western United States, the Company and the lenders
amended the terms of the credit facilities totaling $213 million at December
31, 1999. Under this amendment two former credit facilities were amended into
one new facility and the Company paid down approximately $106 million of the
debt with proceeds from the sale, extended the maturity date to November 30,
2002 from November 30, 2000 and converted the remaining balance owed,
approximately $107 million, to a floating rate facility. In addition, the
Company paid approximately $4.3 million to "break" the interest rate lock
agreement on $54 million related to this debt. Under the original terms of the
loan agreement when the loan matured in November 2000 and converted to a term
loan, the interest rate would be based on a benchmark treasury rate of 7.235%.
Also as discussed previously in Item 2, the Board of Directors is
actively pursuing the sale of the Company as a whole. During the fourth quarter
of 2000 Whitehall and Edgecliff each made a proposal to acquire all of the
outstanding shares of the Company. With regard to this strategic alternative
the Company had received offers from Whitehall and Edgecliff to acquire the
Company. On December 26, 2000, the Company entered into an Exclusivity
Agreement with Edgecliff. Under the terms of the Exclusivity Agreement the
Company has granted Edgecliff an exclusive 60-day period during which the two
parties will attempt to negotiate a definitive agreement, and Edgecliff will
complete its due diligence review; Edgecliff has agreed not to make an offer to
purchase the Company at any time during the next 12 months for less than $4.75
per share; Lodgian may continue to sell specified assets during the exclusivity
period; Lodgian is permitted to consider other unsolicited offers for the
Company if the Lodgian board concludes that such offers are superior to
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Edgecliff's proposal; and the Company is not obligated to reimburse Edgecliff
for any of its expenses, nor is the Company obligated to pay any break-up fee
should the Company pursue another transaction. During the fourth quarter, per
the October 12, 2000 exclusivity agreement with Whitehall, the Company recorded
a charge of $3.5 million relating to reimbursing Whitehall the expenses it
incurred in connection with evaluating and pursuing the transaction. The Company
is unable to predict whether the Exclusivity Agreement entered into with
Edgecliff will ultimately result in an actual sale of the Company.
Considering the amendments to the existing loan agreements and the
debt repayments discussed above, the Company's total outstanding debt as of
December 31, 2000 (excluding CRESTS) is approximately $754.5 million. Of this
amount $80.0 million is due in 2001. As discussed previously, the Company's
estimated capital expenditures for 2001 is approximately $38.6 million (net of
escrowed funds of $14.7 million). As of December 31, 2000, the Company's held
for sale properties have an estimated fair value of approximately $49.4
million, and which are encumbered by indebtedness of approximately $7.9 million
due subsequent to 2001.
In 2001, the Company will need to sell assets and therefore will
continue to identify properties to be classified as held for sale to meet its
$80.0 million amortization payment requirements in 2001 and its capital
improvement program. Although the Company anticipates being able to sell
sufficient assets to meet its obligations in 2001, there can be no assurances
that the sales will occur or generate sufficient net proceeds to meet these
obligations.
On December 15, 2000 the Company sold its hotel under construction in
Richmond, Virginia and retained $10.0 million of the proceeds for general
corporate purposes. The Company currently has $23.3 million of availability on
its revolving credit facility. The Company anticipates borrowing the majority
available under its revolving credit facility in January 2001 to cover certain
interest and operating obligations. The Company believes that the combination
of its current cash position, cash flow from operations, availability on the
revolving credit facility and net proceeds from property (both properties
identified and to be identified) sales will provide sufficient liquidity to
fund the Company's operating, capital expenditure and debt service obligations
through December 31, 2001.
INFLATION
The rate of inflation has not had a material effect on the Company's
revenues or costs and expenses in recent years and it is not anticipated that
inflation will have a material effect on the Company in the near term.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1999, a contractor hired by Servico to perform work on hotels
in New York, Illinois and Texas filed a complaint against the Company in the
Supreme Court of the State of New York, claiming breach of contract and quantum
meruit, among other claims. The contractor seeks damages totaling $80 million,
including $60 million punitive damages. The Company answered the complaint
asserting counterclaims aggregating $20 million and successfully filed a motion
to dismiss the claims related to two properties located in Illinois and Texas.
In October 1999, a subcontractor filed a lawsuit in Texas against the above
contractor and the Company. The Company has filed an answer and cross-claim
against the contractor in the amount of $2.8 million. In February 2000, the
contractor filed a lawsuit in Texas claiming over $3 million in actual damages
and an undisclosed amount of punitive damages. The Company answered the
complaint and asserted a counterclaim. The Company has also filed a lawsuit
against the contractor in Federal District Court in Illinois, seeking $2
million. The contractor has filed an answer and counterclaim aggregating $2.8
million in actual damages and $10 million in punitive damages. The Company
believes that it has valid defenses and counterclaims in these matters and that
the outcome will not have a material adverse effect on its financial position or
results of operations.
On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an
arbitration claim against the Company claiming breach of contract relating to a
January 4, 1992 contract. WH claims entitlement to profit participation relating
to the sale of certain hotel properties by an affiliate and predecessor of the
Company. Although the Demand for Arbitration does not make a specific damages
demand, it is believed that WH is claiming approximately $1,100,000 from the
Company. Lodgian believes it has meritorious defenses to this matter and is
defending it vigorously.
The Company is a party to other legal proceedings arising in the
ordinary course of business, the impact of which would not, either individually
or in the aggregate, in management's opinion, have a material adverse effect on
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
The Company has not paid any cash dividends since the Merger and has no
current plans to initiate the payment of dividends. The Company currently
anticipates that it will retain any future earnings for use in its business. The
Board of Directors of the Company will determine future dividend policies based
on the Company's financial condition, profitability, cash flow, capital
requirements and business outlook, among other factors. The Company's ability to
pay dividends is restricted by the Indenture governing the Company's 12 1/4%
Senior Subordinated Notes due 2009, the Company's credit agreement dated as of
July 23, 1999 among the Company, Lodgian Financing Corp., certain other of the
Company's subsidiaries and the banks named therein, and the Indenture governing
the Company's Convertible Redeemable Equity Structures Trust Securities
("CRESTS"). On June 30, 2000, the Company exercised its rights to begin the
deferral of dividend payments on the CRESTS, effective with the interest payment
due June 30, 2000. Pursuant to the terms of the instrument, the Company has the
right to defer payment for up to twenty quarters (the "Extension Period"),
during which Extension Period no interest shall be due and payable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of the exhibits required to be filed as part of this Report on
Form 10-Q is set forth in the "Exhibit Index" which immediately precedes such
exhibits, and is incorporated herein by reference.
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(b) Reports on Form 8-K
A report on Form 8-K was filed on July 25, 2000 relating to
announcement of the date of the 2000 Annual Stockholders Meeting.
A report on Form 8-K was filed on September 21, 2000 relating to
retention of new independent auditors for the year ending December 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
LODGIAN, INC.
Registrant
DATE: January 10, 2001 /s/ Robert S. Cole
---------------------------------------------------
Robert S. Cole
President and Chief Executive Officer
DATE: January 10, 2001 /s/ Thomas R. Eppich
---------------------------------------------------
Thomas R. Eppich
Chief Financial Officer
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27 -- Financial Data Schedule (For SEC use only)
</TABLE>
34
